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EX-10.2 - EXHIBIT 10.2- SEROTA LETTER AGREEMENT - SANDRIDGE ENERGY INCsdq133116ex102-serotalette.htm
EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION - CEO - SANDRIDGE ENERGY INCsdq133116ex311-section302c.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION - CFO - SANDRIDGE ENERGY INCsdq133116ex312-section302c.htm
EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATIONS - SANDRIDGE ENERGY INCsdq133116ex321-section906c.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
Form 10-Q
__________________________ 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33784
__________________________ 
SANDRIDGE ENERGY, INC.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
 
20-8084793
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma
 
73102
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(405) 429-5500
Former name, former address and former fiscal year, if changed since last report: Not applicable
__________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on May 10, 2016, was 719,000,056.
 




References in this report to the “Company” and “SandRidge” mean SandRidge Energy, Inc., including its consolidated subsidiaries and its proportionately consolidated share of each of the SandRidge Mississippian Trust I (the “Mississippian Trust I”), SandRidge Mississippian Trust II (the “Mississippian Trust II”) and SandRidge Permian Trust (the “Permian Trust”)(each individually, a “Royalty Trust” and collectively, the “Royalty Trusts”).

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) of the Company includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements express a belief, expectation or intention and generally are accompanied by words that convey projected future events or outcomes. These forward-looking statements may include projections and estimates concerning the Company’s capital expenditures, liquidity, capital resources and debt profile, the potential effects of a restructuring transaction on the Company’s operations, management, and employees, the Company’s ability to consummate a restructuring transaction, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, elements of the Company’s business strategy, compliance with governmental regulation of the oil and natural gas industry, including environmental regulations, acquisitions and divestitures and the effects thereof on the Company’s financial condition and other statements concerning the Company’s operations and financial performance and condition. Forward-looking statements are generally accompanied by words such as “estimate,” “assume,” “target,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal,” “should,” “intend” or other words that convey the uncertainty of future events or outcomes. The Company has based these forward-looking statements on its current expectations and assumptions about future events. These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors the Company believes are appropriate under the circumstances. The actual results or developments anticipated may not be realized or, even if substantially realized, may not have the expected consequences to or effects on the Company’s business or results. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. These forward-looking statements speak only as of the date hereof. The Company disclaims any obligation to update or revise these forward-looking statements unless required by law, and it cautions readers not to rely on them unduly. While the Company’s management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties relating to, among other matters, the risks and uncertainties discussed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”) and in Item 1A of this Quarterly Report.

The forward-looking statements related to one or more plans of reorganization (the “Plan”) involve known and unknown risks, uncertainties, assumptions and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by other forward-looking statements contained in this Quarterly Report on Form 10-Q, including but not limited to potential adverse effects related to the following: potential restructuring of the Company’s outstanding debt and related effects on the holders of the Company’s outstanding equity; potential effects of the industry downturn on the Company’s business, financial condition and results of operations; potential limitations on the Company’s ability to maintain contracts and other critical business relationships; requirements for adequate liquidity to fund operations in the future, including obtaining sufficient financing on acceptable terms; and other matters related to the potential restructuring and indebtedness, including any defaults related thereto.




SANDRIDGE ENERGY, INC.
FORM 10-Q
Quarter Ended March 31, 2016

INDEX




PART I. Financial Information

ITEM 1. Financial Statements
SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) 
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
694,042

 
$
435,588

Accounts receivable, net
72,774

 
127,387

Derivative contracts
61,403

 
84,349

Prepaid expenses
10,427

 
6,833

Other current assets
15,239

 
19,931

Total current assets
853,885

 
674,088

Oil and natural gas properties, using full cost method of accounting
 
 
 
Proved
11,961,413

 
12,529,681

Unproved
350,646

 
363,149

Less: accumulated depreciation, depletion and impairment
(11,035,575
)
 
(11,149,888
)
 
1,276,484

 
1,742,942

Other property, plant and equipment, net
426,537

 
491,760

Other assets
17,153

 
13,237

Total assets
$
2,574,059

 
$
2,922,027


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
(In thousands, except per share data) 
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt
$
3,981,371

 
$

Accounts payable and accrued expenses
263,665

 
428,417

Derivative contracts
355

 
573

Asset retirement obligations
8,440

 
8,399

Total current liabilities
4,253,831

 
437,389

Long-term debt

 
3,562,378

Asset retirement obligations
62,279

 
95,179

Other long-term obligations
11,147

 
14,814

Total liabilities
4,327,257

 
4,109,760

Commitments and contingencies (Note 10)

 

Equity (deficit)
 
 
 
SandRidge Energy, Inc. stockholders’ equity (deficit)
 
 
 
Preferred stock, $0.001 par value, 50,000 shares authorized
 
 
 
8.5% Convertible perpetual preferred stock; 2,650 shares issued and outstanding at March 31, 2016 and December 31, 2015; aggregate liquidation preference of $265,000
3

 
3

7.0% Convertible perpetual preferred stock; 2,597 shares issued and outstanding at March 31, 2016; aggregate liquidation preference of $259,700; 2,770 shares issued and outstanding at December 31, 2015; aggregate liquidation preference of $277,000
3

 
3

Common stock, $0.001 par value; 1,800,000 shares authorized; 721,256 issued and 719,288 outstanding at March 31, 2016 and 635,584 issued and 633,471 outstanding at December 31, 2015
718

 
630

Additional paid-in capital
5,312,363

 
5,301,136

Additional paid-in capital—stockholder receivable
(1,250
)
 
(1,250
)
Treasury stock, at cost
(5,291
)
 
(5,742
)
Accumulated deficit
(7,059,723
)
 
(6,992,697
)
Total SandRidge Energy, Inc. stockholders’ deficit
(1,753,177
)
 
(1,697,917
)
Noncontrolling interest
(21
)
 
510,184

Total stockholders’ deficit
(1,753,198
)
 
(1,187,733
)
Total liabilities and stockholders’ deficit
$
2,574,059

 
$
2,922,027


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Months Ended March 31,
 
2016
 
2015
 
(Unaudited)
Revenues
 
 
 
Oil, natural gas and NGL
$
84,375

 
$
195,732

Midstream and marketing
4,287

 
8,764

Drilling and services
1,232

 
9,845

Other
438

 
967

Total revenues
90,332

 
215,308

Expenses
 
 
 
Production
47,282

 
89,498

Production taxes
1,708

 
4,514

Cost of sales
4,268

 
12,827

Midstream and marketing
1,084

 
8,107

Depreciation and depletion—oil and natural gas
32,326

 
106,107

Depreciation and amortization—other
6,835

 
13,347

Accretion of asset retirement obligations
1,588

 
1,080

Impairment
110,114

 
1,083,866

General and administrative
74,278

 
36,149

Gain on derivative contracts
(2,808
)
 
(49,827
)
Loss on settlement of contract
89,092

 

Gain on sale of assets
(1,880
)
 
(1,904
)
Total expenses
363,887

 
1,303,764

Loss from operations
(273,555
)
 
(1,088,456
)
Other (expense) income
 
 
 
Interest expense
(81,151
)
 
(62,842
)
Gain on extinguishment of debt
41,331

 

Other income (expense), net
153

 
(536
)
Total other expense
(39,667
)
 
(63,378
)
Loss before income taxes
(313,222
)
 
(1,151,834
)
Income tax expense
4

 
40

Net Loss
(313,226
)
 
(1,151,874
)
Less: net loss attributable to noncontrolling interest

 
(116,921
)
Net loss attributable to SandRidge Energy, Inc.
(313,226
)
 
(1,034,953
)
Preferred stock dividends
10,881

 
10,881

Loss applicable to SandRidge Energy, Inc. common stockholders
$
(324,107
)
 
$
(1,045,834
)
Loss per share
 
 
 
Basic
$
(0.47
)
 
$
(2.19
)
Diluted
$
(0.47
)
 
$
(2.19
)
Weighted average number of common shares outstanding
 
 
 
Basic
689,784

 
478,165

Diluted
689,784

 
478,165


The accompanying notes are an integral part of these condensed consolidated financial statements.

6


SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands) 
 
SandRidge Energy, Inc. Stockholders
 
 
 
 
 
Convertible Perpetual Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Non-controlling Interest
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(Unaudited)
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
5,420

 
$
6

 
633,471

 
$
630

 
$
5,299,886

 
$
(5,742
)
 
$
(6,992,697
)
 
$
510,184

 
$
(1,187,733
)
Cumulative effect of adoption of ASU 2015-02

 

 

 

 

 

 
257,081

 
(510,205
)
 
(253,124
)
Purchase of treasury stock

 

 

 

 

 
(37
)
 

 

 
(37
)
Retirement of treasury stock

 

 

 

 
(37
)
 
37

 

 

 

Stock distributions, net of purchases - retirement plans

 

 
145

 

 
(451
)
 
451

 

 

 

Stock-based compensation

 

 

 

 
7,394

 

 

 

 
7,394

Cancellations of restricted stock awards, net of issuance

 

 
(938
)
 
1

 
(1
)
 

 

 

 

Common stock issued for debt

 

 
84,390

 
84

 
4,325

 

 

 

 
4,409

Conversion of preferred stock to common stock
(173
)
 

 
2,220

 
3

 
(3
)
 

 

 

 

Net loss

 

 

 

 

 

 
(313,226
)
 

 
(313,226
)
Convertible perpetual preferred stock dividends

 

 

 

 

 

 
(10,881
)
 

 
(10,881
)
Balance at March 31, 2016
5,247

 
$
6

 
719,288

 
$
718

 
$
5,311,113

 
$
(5,291
)
 
$
(7,059,723
)
 
$
(21
)
 
$
(1,753,198
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Three Months Ended March 31,
 
2016
 
2015
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(313,226
)
 
$
(1,151,874
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
 
 
 
Provision for doubtful accounts
16,701

 

Depreciation, depletion and amortization
39,161

 
119,454

Accretion of asset retirement obligations
1,588

 
1,080

Impairment
110,114

 
1,083,866

Debt issuance costs amortization
3,350

 
2,225

Amortization of discount, net of premium, on debt
2,013

 
142

Gain on extinguishment of debt
(41,331
)
 

Write off of debt issuance costs

 
2,221

Gain on debt derivatives
(1,324
)
 

Cash paid for early conversion of convertible notes
(33,452
)
 

Gain on derivative contracts
(2,808
)
 
(49,827
)
Cash received on settlement of derivative contracts
25,536

 
136,957

Loss on settlement of contract
89,092

 

Cash paid on settlement of contract
(11,000
)
 

Gain on sale of assets
(1,880
)
 
(1,904
)
Stock-based compensation
6,753

 
4,024

Other
89

 
90

Changes in operating assets and liabilities
(52,020
)
 
(56,359
)
Net cash (used in) provided by operating activities
(162,644
)
 
90,095

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures for property, plant and equipment
(70,546
)
 
(377,052
)
Acquisition of assets
(95
)
 
(1,739
)
Proceeds from sale of assets
3,172

 
2,755

Net cash used in investing activities
(67,469
)
 
(376,036
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings
488,900

 
420,000

Repayments of borrowings

 
(245,000
)
Debt issuance costs
(296
)
 
(1,905
)
Noncontrolling interest distributions

 
(43,716
)
Purchase of treasury stock
(37
)
 
(1,609
)
Dividends paid — preferred

 
(11,261
)
Net cash provided by financing activities
488,567

 
116,509

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
258,454

 
(169,432
)
CASH AND CASH EQUIVALENTS, beginning of year
435,588

 
181,253

CASH AND CASH EQUIVALENTS, end of period
$
694,042

 
$
11,821

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid for interest, net of amounts capitalized
$
(75,450
)
 
$
(90,286
)
Supplemental Disclosure of Noncash Investing and Financing Activities
 
 
 
Cumulative effect of adoption of ASU 2015-02
$
(247,566
)
 
$

Property, plant and equipment transferred in settlement of contract
$
(215,635
)
 
$

Change in accrued capital expenditures
$
17,065

 
$
56,861

Equity issued for debt
$
4,409

 
$


The accompanying notes are an integral part of these condensed consolidated financial statements.

8


SANDRIDGE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

Nature of Business. SandRidge Energy, Inc. is an energy company with a principal focus on exploration and production activities in the Mid-Continent and Rockies regions of the United States. The Company also operates an electrical transmission system.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned or majority owned subsidiaries. During the three-month period ended March 31, 2015, the Company fully consolidated the activities of the Royalty Trusts as variable interest entities (“VIEs”) for which the Company was the primary beneficiary. Activities of the Royalty Trusts attributable to third party ownership were presented as noncontrolling interest and included as a component of equity in the condensed consolidated balance sheet as of December 31, 2015. As discussed further below, during the three-month period ended March 31, 2016, the Company proportionately consolidated the activities of the Royalty Trusts. All significant intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements as of December 31, 2015 have been derived from the audited financial statements contained in the Company’s 2015 Form 10-K. The unaudited interim condensed consolidated financial statements have been prepared in accordance with the accounting policies stated in the audited consolidated financial statements contained in the 2015 Form 10-K. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the accompanying financial statements include all adjustments, which consist of normal recurring adjustments, necessary to state fairly the information in the Company’s accompanying unaudited condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2015 Form 10-K.

Significant Accounting Policies. For a description of the Company’s significant accounting policies, see Note 1 of the consolidated financial statements included in the 2015 Form 10-K.

Reclassifications. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications have no effect on the Company’s previously reported results of operations.

Use of Estimates. The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The more significant areas requiring the use of assumptions, judgments and estimates include: oil, natural gas and natural gas liquids (“NGL”) reserves; impairment tests of long-lived assets; depreciation, depletion and amortization; asset retirement obligations; determinations of significant alterations to the full cost pool and related estimates of fair value used to allocate the full cost pool net book value to divested properties, as necessary; income taxes; valuation of derivative instruments; contingencies; and accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ significantly.

Recent Accounting Pronouncements. In February 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis,” which makes changes to both the variable interest model and the voting model, affecting all reporting entities involved with limited partnerships or similar entities, particularly industries such as the oil and gas, transportation and real estate sectors. The guidance simplifies and improves current guidance by placing more emphasis on risk of loss when determining a controlling financial interest and reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE. The requirements of the guidance were effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. The Company adopted this guidance on January 1, 2016, which resulted in the determination that the Royalty Trusts no longer qualify as VIEs. As a result, for the three-month period ended March 31, 2016, the Company proportionately consolidated the activities of the Royalty Trusts. Under the proportionate consolidation method, the Company accounts for only its share of each Royalty Trust’s asset, liabilities, revenues and expenses within the appropriate

9

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


classifications in the accompanying unaudited condensed consolidated financial statements. The Company adopted the provisions of ASU 2015-02 on a modified retrospective approach by recording a cumulative-effect adjustment as of January 1, 2016 that resulted in decreases of approximately $243.4 million to total assets and approximately $510.2 million to noncontrolling interest and increases of approximately $9.7 million to accounts payable and approximately $257.1 million to retained earnings.

In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, consistent with the presentation of a debt discount. The guidance is effective on a retrospective basis for annual periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. The guidance was adopted on January 1, 2016, and resulted in a decrease of approximately $69.1 million to other assets and current maturities of long-term debt in the accompanying condensed consolidated balance sheet for the year ended December 31, 2015, with no impact to the accompanying condensed consolidated statements of operations. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which excludes line-of-credit debt issuance costs from the scope of ASU 2015-03. The guidance was adopted on January 1, 2016 in conjunction with the adoption of ASU 2015-03 by making an accounting policy election to present line-of-credit arrangement debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. The adoption of this policy resulted in no impact to the consolidated financial statements.
    
Recent Accounting Pronouncements Not Yet Adopted. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain of the provisions also amend or supersede existing guidance applicable to the recognition of a gain or loss on transfers of nonfinancial assets that are not an output of an entity’s ordinary activities, including sales of property, plant and equipment and real estate. In August, 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU 2014-09 to annual periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted, and either a full retrospective or modified approach may be used for adoption. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company evaluated the effect of the guidance and has determined that it will have no impact on its related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires companies to recognize the assets and liabilities for the rights and obligations created by long-term leases of assets on the balance sheet. The guidance requires adoption by application of a modified retrospective transition approach for existing long-term leases and is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments” which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, which is one of the criteria for bifurcating an embedded derivative. The amendments eliminate diversity in practice in assessing embedded contingent call (put) options in debt instruments. The guidance requires adoption by application of a modified retrospective approach to existing and future debt instruments effective for fiscal years after December 15, 2016, including interim periods within those years.  Early adoption is permitted. The Company is currently evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Share-Based Payment Accounting” which was part of the FASB simplification initiative and involves several aspects of the accounting for share-based payment transactions, including

10

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance requires adoption by various application methods. All amendments must be adopted in the same period. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

2. Going Concern

The Company depends on cash flows from operating activities and, as necessary and available, borrowings under its senior secured revolving credit facility (the “senior credit facility”) to fund its capital expenditures. Additionally, the Company historically has used proceeds from the issuance of equity and debt securities in the capital markets and from sales or other monetizations of assets to fund its capital expenditures.

The market price for oil, natural gas and NGLs decreased significantly beginning in the fourth quarter of 2014, continuing throughout 2015, and into 2016. The decrease in the market price for production directly reduces the Company’s cash flow from operations and indirectly impacts its other potential sources of funds described above. The Company borrowed all of its remaining available capacity under the senior credit facility in January 2016 and in March 2016, the lenders under the senior credit facility elected to reduce the borrowing base to $340.0 million. On March 21, 2016, the Company notified the administrative agent of the senior credit facility (the “administrative agent”) that the Company would submit for the administrative agent’s consideration proposed additional oil and gas properties to serve as collateral under the senior credit facility sufficient to support a borrowing base of $500.0 million. Additionally, the Company notified the administrative agent that it believed the currently pledged assets were sufficient to support a borrowing base of $500.0 million and reserved the right to exercise all other options available to remedy the borrowing base deficiency, if any. On April 20, 2016, the Company submitted such additional properties for consideration by its lenders. Lower market prices for production may result in further reductions to the borrowing base under the senior credit facility or higher borrowing costs from other potential sources of financing as the Company’s borrowing capacity and borrowing costs are generally related to the value of the Company’s estimated proved reserves. The weakness in pricing may also impact the Company’s ability to negotiate asset monetizations at acceptable prices.

As a result of the impacts to the Company’s financial position resulting from declining industry conditions and in consideration of the substantial amount of debt outstanding, the Company has engaged advisors to assist with the evaluation of strategic alternatives. The Company believes that a filing under Chapter 11 provides the most expeditious manner in which to enhance its liquidity position and effect a substantial reduction in its debt obligations. However, there can be no assurances that the Company will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions. As a result of these uncertainties, management has concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern as it is currently structured.

The report of the Company’s independent registered public accounting firm that accompanied the consolidated financial statements for the year ended December 31, 2015 contained an explanatory paragraph regarding the substantial doubt about the Company’s ability to continue as a going concern. On March 31, 2016, the administrative agent under the amended senior credit agreement (the “First Lien Credit Agreement”) notified the Company that its failure to deliver financial statements without a “going concern” qualification resulted in a default under the terms of the First Lien Credit Agreement. Pursuant to the terms of the First Lien Credit Agreement, a 30-day grace period expired on April 30, 2016 and such default ripened into an event of default.

Pursuant to the First Lien Credit Agreement, on or before May 15, 2016, the Company is required to deliver (i) financial statements for the quarter ended March 31, 2016 and (ii) a compliance certificate calculating the ratios and reflecting compliance with the financial covenants therein, including the maintenance of agreed upon levels for the (a) ratio of total secured debt under the senior credit facility to EBITDA, which may not exceed 2.00:1.00 at each quarter end and (b) ratio of current assets to current liabilities, which must be at least 1.00:1.00 at each quarter end. The Company believes that it will be unable to satisfy the financial covenant concerning the ratio of current assets to current liabilities, resulting in an event of default under the First Lien Credit Agreement.

On May 11, 2016, the Company entered into a restructuring support and lock-up agreement (including term sheets and other exhibits attached thereto, the “Restructuring Support Agreement” or “RSA”) pursuant to which the Company’s lenders under the senior credit facility agreed to waive the going concern default and the expected financial covenant default noted above until May 31, 2016. Under the terms of the Restructuring Support Agreement, the lenders have also agreed to forbear from exercising

11

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


any remedies available to them under the First Lien Credit Agreement in connection with the Company’s failure to support a borrowing base of $500.0 million.

On May 16, 2016, the Company and certain of its direct and indirect subsidiaries (collectively with the Company, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its senior credit facility, its Senior Secured Notes (as defined below) and its Unsecured Notes (as defined below). Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. For further discussion of the Company’s Bankruptcy Petitions and the Chapter 11 Cases, as defined and discussed in Note 17.

The factors noted above create uncertainty associated with the Company’s ability to repay its outstanding long-term debt obligations as they become due and further reinforces the substantial doubt over the Company’s ability to continue as a going concern.

The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern, except for the classification of all debt as current.

3. Divestiture

Divestiture of West Texas Overthrust (the “WTO”) Properties and Release from Treating Agreement. On January 21, 2016, the Company paid $11.0 million in cash and transferred ownership of substantially all of its oil and natural gas properties and midstream assets located in the Piñon field in the WTO to Occidental Petroleum Corporation (“Occidental”) and was released from all past, current and future claims and obligations under an existing 30 year treating agreement between the companies. As of the date of the transaction, the Company had accrued approximately $111.9 million for penalties associated with shortfalls in meeting its delivery requirements under the agreement since it became effective in late 2012. The Company recognized a loss of approximately $89.1 million on the termination of the treating agreement and the cease-use of transportation agreements that supported production from the Piñon field.

4. Fair Value Measurements

The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the following levels of the fair value hierarchy:

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
Level 2
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 
 
Level 3
Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity).

Assets and liabilities that are measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. The Company has assets and liabilities classified in each level of the hierarchy as of March 31, 2016 and December 31, 2015, as described below.

Level 1 Fair Value Measurements

12

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Investments. The fair value of investments, consisting of assets attributable to the Company’s non-qualified deferred compensation plan, is based on quoted market prices. Investments are included in other assets in the accompanying unaudited condensed consolidated balance sheets.

Level 2 Fair Value Measurements

Commodity Derivative Contracts. The fair values of the Company’s oil and natural gas fixed price swaps and oil and natural gas collars are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors and discount rates, or can be corroborated from active markets. Fair value is determined through the use of a discounted cash flow model or option pricing model using the applicable inputs, discussed above. The Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit default risk rating, as applicable, in determining the fair value of these derivative contracts. Credit default risk ratings are based on current published credit default swap rates.

Mandatory Prepayment Feature - PGC Senior Secured Notes. In conjunction with the acquisition of and termination of a gathering agreement with Piñon Gathering Company, LLC (“PGC”) in October 2015, the Company issued the PGC Senior Secured Notes with a $78.0 million principal value. These notes bear payment terms identical to and are secured by the same assets as the 8.75% Senior Secured Notes due 2020 issued by the Company in June 2015 as discussed in Note 7. The 8.75% Senior Secured Notes due 2020 issued in June 2015 and PGC Senior Secured Notes (collectively, “Senior Secured Notes”) will mature on June 1, 2020; provided, however, that if on October 15, 2019, the aggregate outstanding principal amount of the Company’s unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million, the Senior Secured Notes will mature on October 16, 2019. The issuance of the PGC Senior Secured Notes at a substantial discount, as discussed in Note 7 and Note 8, resulted in the treatment of the mandatory prepayment feature contained in those notes as an embedded derivative that meets the criteria to be bifurcated from its host contract, the PGC Senior Secured Notes, and accounted for separately from those notes. The mandatory prepayment feature contained in the PGC Senior Secured Notes is recorded at fair value each reporting period based upon values determined through the use of discounted cash flow models of the PGC Senior Secured Notes both (i) with the mandatory prepayment feature and (ii) excluding the mandatory prepayment feature.

Level 3 Fair Value Measurements

Commodity Derivative Contracts. The fair values of the Company’s natural gas basis swaps are based upon quotes obtained from counterparties to the derivative contracts. These values were reviewed internally for reasonableness through the use of a discounted cash flow model using non-exchange traded regional pricing information. Additionally, the Company applied a weighted average credit default risk rating factor for its counterparties or gave effect to its credit risk, as applicable, in determining the fair value of these commodity derivative contracts. The significant unobservable input used in the fair value measurement of the Company’s natural gas basis swaps is the estimate of future natural gas basis differentials. Significant increases (decreases) in natural gas basis differentials could result in a significantly higher (lower) fair value measurement. The significant unobservable inputs and the range and weighted average of these inputs used in the fair value measurements of the Company’s natural gas basis swaps at March 31, 2016 and December 31, 2015 are included in the table below.
Unobservable Input
 
Range
 
Weighted Average
 
Fair Value
 
 
(Price per Mcf)
 
(In thousands)
March 31, 2016
 
 
 
 
 
 
 
 
Natural gas basis differential forward curve
 
$
(0.12
)
$
(0.30
)
 
$
(0.24
)
 
$
(1,162
)
December 31, 2015
 
 
 
 
 
 
 
 
Natural gas basis differential forward curve
 
$
(0.06
)
$
(0.28
)
 
$
(0.22
)
 
$
(1,748
)

Debt Holder Conversion Feature. The Company’s 8.125% Convertible Senior Notes due 2022 and 7.5% Convertible Senior Notes due 2023 (collectively, the “Convertible Senior Unsecured Notes” and together with the Senior Unsecured Notes, the “Unsecured Notes”), each contain a conversion option whereby the Convertible Senior Unsecured Notes holders have the option to convert the notes into shares of Company common stock. Further, with respect to any such conversions prior to the second anniversary of the issuance of the Convertible Senior Unsecured Notes, in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment. These conversion features have been identified as embedded derivatives

13

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


that meet the criteria to be bifurcated from their host contracts, the Convertible Senior Unsecured Notes, and accounted for separately from those notes. The holder conversion features are recorded at fair value each reporting period.

The fair values of the holder conversion features were determined using a binomial lattice model based on certain assumptions including (i) the Company’s stock price, (ii) risk-free rate, (iii) recovery rate, (iv) hazard rate and (v) expected volatility. The significant unobservable input used in the fair value measurement of the conversion features is the hazard rate, an estimate of default probability. Significant increases (decreases) in the hazard rate could result in significantly (lower) higher fair value measurement. The significant unobservable inputs and range and weighted average of these inputs used in the fair value measurement of the conversion options at March 31, 2016 and December 31, 2015 are included in the table below.
Unobservable Input
 
Range
 
Weighted Average
 
Fair Value
 
 
 
 
(In thousands)
March 31, 2016
 
 
 
 
 
 
 
 
Debt conversion feature hazard rate
 
104.9
%
114.2
%
 
109.9
%
 
$
7,281

December 31, 2015
 
 
 
 
 
 
 
 
Debt conversion feature hazard rate
 
114.0
%
135.2
%
 
119.2
%
 
$
29,355


See further discussion of the Convertible Senior Unsecured Notes at Note 7.

Guarantee. The Company guaranteed on behalf of Fieldwood Energy, LLC (“Fieldwood”) certain plugging and abandonment obligations associated with the sale of its Gulf of Mexico and Gulf Coast oil and natural gas properties (the “Gulf Properties”) from the date of closing in February 2014 until the Company was released from the guarantee in the third quarter of 2015. The fair value of this guarantee was based on the present value of estimated future payments for plugging and abandonment obligations associated with the Gulf Properties, adjusted for the cumulative probability of Fieldwood’s default prior to the Company’s release by the Bureau of Ocean Energy Management (“BOEM”) from its obligation under the guarantee (3.71% at December 31, 2014). The discount and probability of default rates were based upon inputs that are readily available in the public market, such as historical option adjusted spreads of the Company’s senior notes, which are publicly traded, and historical default rates of publicly traded companies with credit ratings similar to Fieldwood. The significant unobservable input used in the fair value measurement of the guarantees was the estimate of future payments for plugging and abandonment of approximately $372.0 million, which was developed based upon third-party quotes and then-current actual costs.

Fair Value - Recurring Measurement Basis

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis by the fair value hierarchy (in thousands):

March 31, 2016
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$
62,210

 
$

 
$
(807
)
 
$
61,403

Investments
9,049

 

 

 

 
9,049

 
$
9,049

 
$
62,210

 
$

 
$
(807
)
 
$
70,452

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$

 
$
1,162

 
$
(807
)
 
$
355

Debt holder conversion feature

 

 
7,281

 

 
7,281

Mandatory prepayment feature - PGC Senior Secured Notes

 
2,496

 

 

 
2,496

 
$

 
$
2,496

 
$
8,443

 
$
(807
)
 
$
10,132



14

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


December 31, 2015
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$
85,524

 
$

 
$
(1,175
)
 
$
84,349

Investments
10,106

 

 

 

 
10,106

 
$
10,106

 
$
85,524

 
$

 
$
(1,175
)
 
$
94,455

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$

 
$
1,748

 
$
(1,175
)
 
$
573

Debt holder conversion feature

 

 
29,355

 

 
29,355

Mandatory prepayment feature - PGC Senior Secured Notes

 
2,941

 

 

 
2,941

 
$

 
$
2,941

 
$
31,103

 
$
(1,175
)
 
$
32,869

____________________
(1)Represents the effect of netting assets and liabilities for counterparties with which the right of offset exists.

Level 3 - Commodity Derivative Contracts. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for commodity derivative contracts during the three-month periods ended March 31, 2016 and 2015 (in thousands): 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Beginning balance
 
$
(1,748
)
 
$
350

Purchases
 

 
347

Loss on commodity derivative contracts
 
586

 
635

Ending balance
 
$
(1,162
)
 
$
1,332


Losses due to changes in fair value of the Company’s Level 3 commodity derivative contracts have been included in gain on derivative contracts in the accompanying unaudited condensed consolidated statements of operations. See Note 8 for further discussion of the Company’s derivative contracts.

Level 3 - Debt Holder Conversion Feature. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for debt holder conversion features during the three-month period ended March 31, 2016 (in thousands):
Beginning balance
 
$
29,355

Gain on derivative holder conversion feature
 
(880
)
Conversions
 
(21,194
)
Ending balance
 
$
7,281


The fair value of the conversion features are determined quarterly with changes in fair value recorded as interest expense.

Level 3 - Guarantee. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for the guarantee during the three-month period ended March 31, 2015 (in thousands): 
Beginning balance
 
$
5,104

Gain on guarantee
 
(313
)
Ending balance
 
$
4,791

While in effect, the fair value of the guarantee was determined quarterly with changes in fair value recorded as an adjustment to the full cost pool.


15

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Transfers. The Company recognizes transfers between fair value hierarchy levels as of the end of the reporting period in which the event or change in circumstances causing the transfer occurred. During the three-month periods ended March 31, 2016 and 2015, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

Fair Value of Financial Instruments

The Company measures the fair value of its Senior Secured Notes, its 8.75% Senior Notes due 2020, 7.5% Senior Notes due 2021, 8.125% Senior Notes due 2022, and 7.5% Senior Notes due 2023 (collectively, the “Senior Unsecured Notes”) and the Convertible Senior Unsecured Notes using pricing that is readily available in the public market. The Company classifies these inputs as Level 2 in the fair value hierarchy. The estimated fair values and carrying values of the Company’s senior notes at March 31, 2016 and December 31, 2015 were as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
8.75% Senior Secured Notes due 2020
$
332,930

 
$
1,267,924

 
$
403,098

 
$
1,265,814

Senior Unsecured Notes
 
 
 
 
 
 
 
8.75% Senior Notes due 2020
$
24,769

 
$
389,645

 
$
39,740

 
$
389,232

7.5% Senior Notes due 2021
$
43,386

 
$
751,416

 
$
79,812

 
$
751,087

8.125% Senior Notes due 2022
$
31,610

 
$
519,026

 
$
57,749

 
$
518,693

7.5% Senior Notes due 2023
$
27,129

 
$
535,191

 
$
58,799

 
$
534,869

Convertible Senior Unsecured Notes
 
 
 
 
 
 
 
8.125% Convertible Senior Notes due 2022
$
103

 
$
14,692

 
$
44,199

 
$
78,290

7.5% Convertible Senior Notes due 2023
$
118

 
$
14,577

 
$
15,125

 
$
24,393


See Note 7 for discussion of the Company’s debt.


16

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


5. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands): 
 
March 31,
2016
 
December 31,
2015
Oil and natural gas properties
 
 
 
Proved(1)
$
11,961,413

 
$
12,529,681

Unproved
350,646

 
363,149

Total oil and natural gas properties
12,312,059

 
12,892,830

Less accumulated depreciation, depletion and impairment
(11,035,575
)
 
(11,149,888
)
Net oil and natural gas properties capitalized costs
1,276,484

 
1,742,942

Land
5,450

 
14,260

Non-oil and natural gas equipment(2)
310,122

 
373,687

Buildings and structures(3)
229,352

 
227,673

Total
544,924

 
615,620

Less accumulated depreciation and amortization
(118,387
)
 
(123,860
)
Other property, plant and equipment, net
426,537

 
491,760

Total property, plant and equipment, net
$
1,703,021

 
$
2,234,702

____________________
(1)
Includes cumulative capitalized interest of approximately $50.3 million and $48.9 million at March 31, 2016 and December 31, 2015, respectively.
(2)
Includes cumulative capitalized interest of approximately $4.3 million at both March 31, 2016 and December 31, 2015.
(3)
Includes cumulative capitalized interest of approximately $20.4 million at both March 31, 2016 and December 31, 2015.

The Company reduced the net carrying value of its oil and natural gas properties by $108.4 million during the three-month period ended March 31, 2016, as a result of its quarterly full cost ceiling analysis. See Note 1 for discussion of the proportionate consolidation of the Royalty Trusts for the three-month period ended March 31, 2016.

The Company disposed of certain drilling and oilfield services assets previously classified as held for sale during the first quarter of 2016 and recorded a loss on the sale of those assets of $1.4 million for the three-month period ended March 31, 2016. At March 31, 2016, the Company has remaining drilling and oilfield services assets with a net book value of $15.2 million classified as held for sale in the other current assets line of the accompanying unaudited condensed consolidated balance sheet, and expects to dispose of these assets prior to the fourth quarter of 2016.

Drilling Carry Commitments

Under the terms of an agreement with Repsol E&P USA, Inc. (“Repsol”), the Company has agreed to carry Repsol’s drilling and completion costs totaling up to approximately $31.0 million for wells drilled in an area of mutual interest. The Company incurred $5.2 million toward this obligation during the three-month period ended March 31, 2016 and had $9.9 million, under the obligation, remaining at March 31, 2016. Other than the above, the Company has no carry or drilling obligations to Repsol.


17

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


6. Other Assets

Other assets consist of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Investments
$
9,049

 
$
10,106

Senior credit facility debt issuance costs, net of amortization
3,012

 
3,131

Utility deposits
4,796

 

Other
296

 

Total other assets
$
17,153

 
$
13,237


7. Debt

Debt, net of unamortized discounts, premiums, and deferred costs of $157.9 million and $342.6 million, and including the fair value of debt derivatives of $9.8 million and $32.3 million, at March 31, 2016 and December 31, 2015, respectively, consists of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Senior credit facility
$
488,900

 
$

8.75% Senior Secured Notes due 2020
1,267,924

 
1,265,814

Senior Unsecured Notes
 
 
 
 8.75% Senior Notes due 2020
389,645

 
389,232

 7.5% Senior Notes due 2021
751,416

 
751,087

 8.125% Senior Notes due 2022
519,026

 
518,693

 7.5% Senior Notes due 2023
535,191

 
534,869

Convertible Senior Unsecured Notes
 
 
 
 8.125% Convertible Senior Notes due 2022
14,692

 
78,290

 7.5% Convertible Senior Notes due 2023
14,577

 
24,393

Total debt
3,981,371

 
3,562,378

Less: current maturities of long-term debt(1)
3,981,371

 

Long-term debt
$

 
$
3,562,378

____________________
(1)
Due to existing and anticipated covenant violations, the Company’s long-term debt was classified as current at March 31, 2016. See Note 2 for further discussion of such covenant violations.

Senior Credit Facility

The senior credit facility is available to be drawn on subject to limitations based on its terms and certain financial covenants.

The senior credit facility contains financial covenants, including maintenance of agreed upon levels for the (a) ratio of total secured debt under the senior credit facility to EBITDA, which may not exceed 2.00:1.00 at each quarter end and (b) ratio of current assets to current liabilities, which must be at least 1.0:1.0 at each quarter end. For the purpose of the current ratio calculation, any amounts available to be drawn under the senior credit facility are included in current assets, and unrealized assets and liabilities resulting from mark-to-market adjustments on the Company’s commodity derivative contracts are disregarded. The senior credit facility matures on the earlier of March 2, 2020 and 91 days prior to the earliest date of any maturity under or mandatory offer to repurchase the Company’s currently outstanding notes.

The senior credit facility also contains various covenants that limit the ability of the Company and certain of its subsidiaries to: grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. The terms of the senior credit facility allow the Company to redeem or purchase outstanding Senior Unsecured Notes for up to $275.0 million in cash subject to certain limitations. Additionally, the senior credit facility limits the ability of the

18

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Company and certain of its subsidiaries to incur additional indebtedness with certain exceptions. As of and during the three-month period ended March 31, 2016, the Company was not in compliance with all applicable financial covenants under the senior credit facility, as its ratio of current assets to current liabilities was less than 1.0:1.0 due to the classification of its long-term debt as current. The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its senior credit facility. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 17 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

The obligations under the senior credit facility are guaranteed by certain Company subsidiaries and are secured by first priority liens on all shares of capital stock of certain of the Company’s material present and future subsidiaries, all of the Company’s intercompany debt, and certain of the Company’s other assets, including proved oil, natural gas and NGL reserves representing at least 80.0% of the discounted present value (as defined in the senior credit facility) of proved oil, natural gas and NGL reserves of the Company.

At the Company’s election, interest under the senior credit facility, as amended, is determined by reference to (a) the ICE Benchmark Administration Limited LIBOR (“LIBOR”) plus an applicable margin between 1.750% and 2.750% per annum or (b) the “base rate,” which is the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate published by Royal Bank of Canada under the senior credit facility or (iii) the one-month Eurodollar rate (as defined in the senior credit facility) plus 1.00% per annum, plus, in each case under scenario (b), an applicable margin between 0.750% and 1.750% per annum. Interest is payable quarterly for base rate loans and at the applicable maturity date for LIBOR loans, except that if the interest period for a LIBOR loan is six months or longer, interest is paid at the end of each three-month period. Quarterly, the Company pays commitment fees assessed at an annual rate of 0.5% on any available portion of the senior credit facility.

Borrowings and letter of credit obligations under the senior credit facility may not exceed the lower of the committed amount, which is currently $1.0 billion, or the borrowing base. On March 11, 2016, the administrative agent notified the Company that the lenders had elected to reduce the borrowing base to $340.0 million from $500.0 million pursuant to a special redetermination. On March 21, 2016, the Company notified the administrative agent that the Company would submit for the administrative agent’s consideration proposed additional oil and gas properties to serve as collateral under the senior credit facility sufficient to support a borrowing base of $500.0 million. Additionally, the Company notified the administrative agent that it believed the currently pledged assets are sufficient to support a borrowing base of $500.0 million and reserved the right to exercise all other options available to remedy the borrowing base deficiency, if any. On April 20, 2016, the Company submitted such additional properties for consideration by its lenders. Pursuant to the terms of the Restructuring Support Agreement entered into on May 11, 2016, the lenders under the senior credit facility have agreed to forbear from exercising any remedies available to them under the First Lien Credit Agreement in connection with the Company’s failure to support a borrowing base of $500.0 million until May 31, 2016. See Note 17 for further discussion of the Restructuring Support Agreement.

Additionally, the First Lien Credit Agreement permits the Company and certain of its subsidiaries to incur additional indebtedness in an aggregate principal amount not to exceed $1.75 billion, which may be secured solely by collateral securing the senior credit facility on a junior lien basis. Any junior lien debt shall be subject to the terms and conditions set forth in an intercreditor agreement and shall mature no earlier than January 21, 2020. The borrowing base under the senior credit facility is reduced by $0.25 for every $1.00 of junior debt incurred above $1.50 billion.

The senior credit facility had $488.9 million drawn at March 31, 2016 and had $10.4 million in outstanding letters of credit, which reduce the availability under the senior credit facility on a dollar-for-dollar basis. Additionally, at March 31, 2016, the Company had incurred $1.3 billion in junior lien debt subject to an intercreditor agreement as a result of the issuance of Senior Secured Notes in June 2015 and the PCG Senior Secures Notes in October 2015.

Senior Secured Notes

The Company issued $1.25 billion of 8.75% Senior Secured Notes due 2020 in June 2015. Net proceeds from the issuance were approximately $1.21 billion after deducting offering expenses, a portion of which was used to repay amounts outstanding at that time under the Company’s senior credit facility. The Senior Secured Notes were issued to qualified institutional buyers eligible under Rule 144A of the Securities Act and to persons outside the United States under Regulation S of the Securities Act.

Additionally, the Company issued the PGC Senior Secured Notes in conjunction with the acquisition of and termination of a gathering agreement with PGC in October 2015. Because the PGC Senior Secured Notes were issued as partial consideration

19

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


for the acquisition and termination, these notes were recorded at fair value of approximately $50.3 million ($78.0 million par value, including mandatory prepayment feature liabilities of $2.8 million, net of $30.5 million discount) upon their issuance. Fair value at issuance was determined based upon the then-current market value of the Senior Secured Notes. The PGC Senior Secured Notes were issued at a discount that is being amortized to interest expense over the term of the Senior Secured Notes.

The Company’s Senior Secured Notes bear interest at a fixed rate of 8.75% per annum, payable semi-annually, with the principal due upon maturity. The Senior Secured Notes are redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on a second-priority secured basis by certain of the Company’s wholly owned subsidiaries.

The Senior Secured Notes are secured by second-priority liens on all of the Company’s and certain of the Company’s wholly owned subsidiaries’ assets that secure the senior credit facility on a first-priority basis; provided, however, the security interest in those assets that secure the Senior Secured Notes and the guarantees will be contractually subordinated to liens thereon that secure the credit facility and certain other permitted indebtedness. Consequently, the Senior Secured Notes and the guarantees will be effectively subordinated to the credit facility and such other indebtedness to the extent of the value of such assets.

Debt issuance costs of $39.3 million incurred in connection with the offering of the Senior Secured Notes outstanding at March 31, 2016 are included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet and are being amortized to interest expense over the term of Senior Secured Notes.

Maturity Date and Mandatory Prepayment Feature. Pursuant to the indenture, the Senior Secured Notes will mature on June 1, 2020; provided, however, that if on October 15, 2019, the aggregate outstanding principal amount of the unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million, the Senior Secured Notes will mature on October 16, 2019. See further discussion of the mandatory prepayment feature, which with respect to the PGC Senior Secured Notes is an embedded derivative that has been accounted for separately from these notes, at Note 4 and Note 8.

Indenture. The indenture governing the Senior Secured Notes contains covenants that restrict the Company’s ability to take a variety of actions, including limitations on the payment of dividends, incurrence of indebtedness, create liens, enter into consolidations or mergers, purchase or redeem stock or subordinated or unsecured indebtedness, certain dispositions and transfers of assets, transactions with related parties, make investments and refinance certain indebtedness. As of and during the three-month period ended March 31, 2016, the Company was in compliance with all of the covenants contained in the indenture governing its outstanding Senior Secured Notes. The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its Senior Secured Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 17 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

Senior Unsecured Notes

The Company’s Senior Unsecured Notes bear interest at a fixed rate per annum, payable semi-annually, with the principal due upon maturity. Certain of the Senior Unsecured Notes were issued at a discount or a premium. The discount or premium is amortized to interest expense over the term of the respective series of Senior Unsecured Notes. The Senior Unsecured Notes are redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries. See Note 16 for condensed financial information of the subsidiary guarantors.

Debt issuance costs of $48.9 million incurred in connection with the offerings and subsequent registered exchange offers of the Senior Unsecured Notes outstanding, including the impact of write offs in conjunction with the repurchase and exchange discussed below, are included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet at March 31, 2016 and are being amortized to interest expense over the term of the respective series of Senior Unsecured Notes.

Indentures. Each of the indentures governing the Company’s Senior Unsecured Notes contains covenants that restrict the Company’s ability to take a variety of actions, including limitations on the incurrence of indebtedness, payment of dividends, investments, asset sales, certain asset purchases, transactions with related parties and consolidations or mergers. As of and during the three-month periods ended March 31, 2016, the Company was in compliance with all of the covenants contained in the indentures governing its outstanding Senior Unsecured Notes. The Company’s filing of the Bankruptcy Petitions constitutes an event of

20

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


default that accelerated the Company’s obligations under its Senior Unsecured Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 17 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

Convertible Senior Unsecured Notes

The Convertible Senior Unsecured Notes were issued in conjunction with exchanges and repurchases of Senior Unsecured Notes that took place in August and October 2015. The Convertible Senior Unsecured Notes are guaranteed by the same guarantors that guarantee the Senior Unsecured Notes and are subject to covenants and bear payment terms substantially identical to those of the corresponding series of Senior Unsecured Notes of similar tenor, other than the conversion features, described further below, and the extension of the final maturity by one day. The transactions were determined to be an extinguishment of each of the Senior Unsecured Notes exchanged. As such, the newly-issued Convertible Senior Unsecured Notes were recorded at fair value on the date of issuance, which resulted in a discount that is being amortized to interest expense over the term of the respective series of Convertible Senior Unsecured Notes.

Debt issuance costs of $1.9 million incurred in connection with the issuance of the Convertible Senior Unsecured Notes, including the impact of write offs in conjunction with the conversions discussed below, are included in current maturities of long-term debt in the unaudited condensed consolidated balance sheet at March 31, 2016 and are being amortized to interest expense over the term of the respective series of Convertible Senior Unsecured Notes.

The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its Convertible Senior Unsecured Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 17 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

Conversion Features. The Convertible Senior Unsecured Notes are convertible, at the option of the holders, into shares of common stock at any time prior to (i) the fifth business day following the date of a mandatory conversion notice, discussed further below, (ii) with respect to Convertible Senior Unsecured Notes called for redemption, the business day immediately preceding the redemption date or (iii) the business day immediately preceding the maturity date. The conversion rate is approximately 363.6 shares of common stock per $1,000 principal amount of the Convertible Senior Unsecured Notes, subject to customary adjustments. With respect to any conversions prior to the first anniversary of the issuance of the Convertible Senior Unsecured notes, in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to the amount of 18 months of interest payable on the applicable series of converted Convertible Senior Unsecured Notes. With respect to any conversion subsequent to the first anniversary of the issuance of the Convertible Senior Unsecured Notes, but on or prior to the second anniversary of the issuance of such Convertible Senior Unsecured Notes, holders are entitled to receive an early conversion payment equal to the amount of 12 months of interest payable on the applicable series of converted Convertible Senior Unsecured Notes. The dilutive effect, if any, of the Convertible Senior Unsecured Notes on the Company’s earnings per share is determined using the if-converted method. See further discussion at Note 13.

See further discussion of the holders’ conversion features, which are embedded derivatives that have been accounted for separately from the Convertible Senior Unsecured Notes, at Note 4 and Note 8.

In addition to the holders’ conversion feature, the Convertible Senior Unsecured Notes contain a provision whereby the Company, subject to compliance with certain conditions, has the right to mandatorily convert the Convertible Senior Unsecured Notes to shares of Company common stock, in whole or in part, at a rate of approximately 363.6 shares of common stock per $1,000 principal amount of Convertible Senior Unsecured Notes, if the volume weighted average price of the Company’s stock exceeds 40.0% of an applicable conversion price of the Convertible Senior Unsecured Notes for a specific period of time. The conversion price threshold, initially set at $1.10, is subject to certain customary adjustments. No early conversion payments will be made upon a mandatory conversion.

Conversions to Common Stock. During the three-month period ended March 31, 2016, holders of $200.5 million aggregate principal amount ($67.4 million net of discount and including holders’ conversion feature) of 8.125% Convertible Senior Notes due 2022 and $31.6 million aggregate principal amount ($10.4 million net of discount and holders’ conversion feature) of 7.5% Convertible Senior Notes due 2023 exercised conversion options applicable to those notes, resulting in the issuance of approximately 84.4 million shares of Company common stock and aggregate cash payments of $33.5 million for accrued interest and early conversion payments. The conversions resulted in a gain on extinguishment of debt totaling $41.3 million, including the write off

21

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


of $4.3 million of net unamortized debt issuance costs, which is included in current maturities of long-term debt on the unaudited condensed consolidated statement of operations for the three-month period ended March 31, 2016.        

8. Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts at fair value. Changes in derivative fair values are recognized in earnings.

Commodity Derivatives. 

The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company seeks to manage this risk through the use of commodity derivative contracts, which allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. None of the Company’s commodity derivative contracts may be terminated prior to contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. Cash settlements and valuation gains and losses on commodity derivative contracts are included in gain on derivative contracts in the unaudited condensed consolidated statements of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. Derivative assets and liabilities arising from the Company’s commodity derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheets. At March 31, 2016, the Company’s commodity derivative contracts consisted of fixed price swaps, basis swaps and collars, which are described below:
Fixed price swaps
The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.
 
 
Basis swaps
The Company receives a payment from the counterparty if the settled price differential is greater than the stated terms of the contract and pays the counterparty if the settled price differential is less than the stated terms of the contract, which guarantees the Company a price differential for oil or natural gas from a specified delivery point.
 
 
Collars
Three-way collars have two fixed floor prices (a purchased put and a sold put) and a fixed ceiling price (call). The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be New York Mercantile Exchange (“NYMEX”) plus the difference between the purchased put and the sold put strike price. The call establishes a maximum price (ceiling) the Company will receive for the volumes under the contract. If the market price is between the ceiling price and purchased put, no payments are due from either party.

The Company recorded a gain on commodity derivative contracts of $2.8 million and $49.8 million for the three-month periods ended March 31, 2016 and 2015, respectively, which includes net cash receipts upon settlement of $25.5 million and $137.0 million, respectively.

Master Netting Agreements and the Right of Offset. The Company has master netting agreements with all of its commodity derivative counterparties and has presented its derivative assets and liabilities with the same counterparty on a net basis in the consolidated balance sheets. As a result of the netting provisions, the Company's maximum amount of loss under commodity derivative transactions due to credit risk is limited to the net amounts due from its counterparties. As of March 31, 2016, the counterparties to the Company’s open commodity derivative contracts consisted of six financial institutions, three of which are also lenders under the Company’s senior credit facility. The Company is not required to post additional collateral under its commodity derivative contracts as the majority of the counterparties to the Company’s commodity derivative contracts share in the collateral supporting the Company’s senior credit facility. The following tables summarize (i) the Company's commodity derivative contracts on a gross basis, (ii) the effects of netting assets and liabilities for which the right of offset exists based on master netting arrangements and (iii) for the Company’s net derivative liability positions, the applicable portion of shared collateral under the senior credit facility (in thousands):

22

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


March 31, 2016
 
 
Gross Amounts
 
Gross Amounts Offset
 
Amounts Net of Offset
 
Financial Collateral
 
Net Amount
Assets
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
62,210

 
$
(807
)
 
$
61,403

 
$

 
$
61,403

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
62,210

 
$
(807
)
 
$
61,403

 
$

 
$
61,403

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
1,162

 
$
(807
)
 
$
355

 
$
(355
)
 
$

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
1,162

 
$
(807
)
 
$
355

 
$
(355
)
 
$


December 31, 2015
 
 
Gross Amounts
 
Gross Amounts Offset
 
Amounts Net of Offset
 
Financial Collateral
 
Net Amount
Assets
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
85,524

 
$
(1,175
)
 
$
84,349

 
$

 
$
84,349

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
85,524

 
$
(1,175
)
 
$
84,349

 
$

 
$
84,349

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
1,748

 
$
(1,175
)
 
$
573

 
$
(573
)
 
$

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
1,748

 
$
(1,175
)
 
$
573

 
$
(573
)
 
$


At March 31, 2016, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps 
 
Notional (MBbls)
 
Weighted Average
Fixed Price
April 2016 - December 2016
1,100

 
$
88.36


Natural Gas Basis Swaps
 
Notional (MMcf)
 
Weighted Average
Fixed Price
April 2016 - December 2016
8,250

 
$
(0.38
)

Oil Collars - Three-way
 
Notional (MBbls)
 
Sold Put
 
Purchased Put
 
Sold Call
April 2016 - December 2016
1,646

 
$
82.99

 
$
90.00

 
$
100.58


Debt - Embedded Derivatives

Debt Holder Conversion Feature. As discussed further in Note 4 and Note 7, the Convertible Senior Unsecured Notes contain a conversion feature that is exercisable at the holders’ option. This conversion feature has been identified as an embedded derivative as the feature (i) possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, the Convertible Senior Unsecured Notes, and (ii) separate, stand-alone instruments with the same terms would qualify as derivative instruments. As such, the holders’ conversion feature has been bifurcated and accounted for separately from

23

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


the Convertible Senior Unsecured Notes. The holders’ conversion feature is recorded at fair value each reporting period with changes in fair value included in interest expense in the unaudited condensed consolidated statement of operations for the three-month period ended March 31, 2016.

Mandatory Prepayment Feature - PGC Senior Secured Notes. As discussed further in Note 4 and Note 7, the Senior Secured Notes contain a mandatory prepayment feature that is triggered if the outstanding principal amount of the unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million on October 15, 2019. With respect to the PGC Senior Secured Notes, which were issued at a substantial discount, this mandatory prepayment feature has been identified as an embedded derivative as the feature (i) possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, the PGC Senior Secured Notes, and (ii) separate, stand-alone instruments with the same terms would qualify as derivative instruments. As such, the mandatory prepayment feature contained in the PGC Senior Secured Notes has been bifurcated and accounted for separately from those notes. The mandatory prepayment feature contained in the PGC Senior Secured notes is recorded at fair value each reporting period with changes in fair value included in interest expense in the accompanying consolidated statement of operations for the year ended March 31, 2016.

Fair Value of Derivatives. 

The following table presents the fair value of the Company’s derivative contracts as of March 31, 2016 and December 31, 2015 on a gross basis without regard to same-counterparty netting (in thousands):
Type of Contract
 
Balance Sheet Classification
 
March 31,
2016
 
December 31,
2015
Derivative assets
 
 
 
 
 
 
Oil price swaps
 
Derivative contracts-current
 
$
50,793

 
$
68,224

Oil collars - three way
 
Derivative contracts-current
 
11,417

 
17,300

Derivative liabilities
 
 
 
 
 
 
Natural gas basis swaps
 
Derivative contracts-current
 
(1,162
)
 
(1,748
)
Debt holder conversion feature
 
Current maturities of long-term debt
 
(7,281
)
 
(29,355
)
Mandatory prepayment feature - PGC Senior Secured Notes
 
Current maturities of long-term debt
 
(2,496
)
 
(2,941
)
Total net derivative contracts
 
$
51,271

 
$
51,480


See Note 4 for additional discussion of the fair value measurement of the Company’s derivative contracts and Note 7 for discussion of the debt holder conversion feature.

9. Asset Retirement Obligations

A reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligations for the period from December 31, 2015 to March 31, 2016 is as follows (in thousands):
Asset retirement obligations at December 31, 2015
$
103,578

Liability incurred upon acquiring and drilling wells
153

Liability settled or disposed in current period(1)
(34,600
)
Accretion
1,588

Asset retirement obligations at March 31, 2016
70,719

Less: current portion
8,440

Asset retirement obligations, net of current
$
62,279

____________________
(1)
Includes $34.1 million associated with the divestiture of the Company’s oil and natural gas properties located in the Piñon field in the WTO, as discussed in Note 3.


24

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


10. Commitments and Contingencies

Legal Proceedings

On April 5, 2011, Wesley West Minerals, Ltd. and Longfellow Ranch Partners, LP filed suit against the Company and SandRidge Exploration and Production, LLC (collectively, the “SandRidge Entities”) in the 83rd District Court of Pecos County, Texas. The plaintiffs, who have leased mineral rights to the SandRidge Entities in Pecos County, allege that the SandRidge Entities have not properly paid royalties on all volumes of natural gas and CO2 produced from the acreage leased from the plaintiffs. The plaintiffs also allege that the SandRidge Entities have inappropriately failed to pay royalties on CO2 produced from the plaintiffs' acreage that results from the treatment of natural gas at Occidental’s CO2 treatment plant in Pecos County, Texas the (“Century Plant”). The plaintiffs seek approximately $45.5 million in actual damages for the period of time between January 2004 and December 2011, punitive damages and a declaration that the SandRidge Entities must pay royalties on CO2 produced from the plaintiffs' acreage that results from treatment of natural gas at the Century Plant. The Commissioner of the General Land Office of the State of Texas (“GLO”) is named as an additional defendant in the lawsuit as some of the affected oil and natural gas leases described in the plaintiffs' allegations cover mineral classified lands in which the GLO is entitled to one-half of the royalties attributable to such leases. The GLO has filed a cross-claim against the SandRidge Entities asserting the same claims as the plaintiffs with respect to the leases covering mineral classified lands and seeking approximately $13.0 million in actual damages, inclusive of penalties and interest. On February 5, 2013, the Company received a favorable summary judgment ruling that effectively removes a majority of the plaintiffs' and GLO's claims. On April 29, 2013, the court entered an order allowing for an interlocutory appeal of its summary judgment ruling.

The plaintiffs appealed the rulings to the Texas Court of Appeals in El Paso. On November 19, 2014, that court issued its opinion, which affirmed the trial court’s summary judgment rulings in part, but reversing them in part. The Court of Appeals affirmed the summary judgment rulings in the SandRidge Entities’ favor against the GLO. The court also affirmed the summary judgment rulings in the SandRidge Entities’ favor against Wesley West Minerals, Ltd., on the largest oil and gas lease involved in the case, which accounted for much of the total damages the plaintiffs are claiming. The court reversed certain rulings on other leases, thus deciding those matters for the plaintiffs. The parties have petitioned the Supreme Court of Texas for review of the Court of Appeals’ decision.

The Company intends to continue to defend the remaining issues in the trial court, as well as future appellate proceedings. At the time of the rulings on summary judgment, the lawsuit was still in the discovery stage and, accordingly, an estimate of reasonably possible losses, if any, associated with the remaining causes of action and those rulings reversed by the Court of Appeals cannot be made until all of the facts, circumstances and legal theories relating to such claims and the SandRidge Entities' defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

Between December 2012 and March 2013, seven putative shareholder derivative actions were filed in state and federal court in Oklahoma:

Arthur I. Levine v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on December 19, 2012 in the U.S. District Court for the Western District of Oklahoma
Deborah Depuy v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the U.S. District Court for the Western District of Oklahoma
Paul Elliot, on Behalf of the Paul Elliot IRA R/O, v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant filed on January 29, 2013 in the U.S. District Court for the Western District of Oklahoma
Dale Hefner v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 4, 2013 in the District Court of Oklahoma County, Oklahoma
Rocky Romano v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the District Court of Oklahoma County, Oklahoma
Joan Brothers v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on February 15, 2013 in the U.S. District Court for the Western District of Oklahoma
Lisa Ezell, Jefferson L. Mangus, and Tyler D. Mangus v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on March 22, 2013 in the U.S. District Court for the Western District of Oklahoma


25

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Each lawsuit identified above was filed derivatively on behalf of the Company and names as defendants current and former directors of the Company. The Hefner lawsuit also names as defendants certain current and former directors and senior executive officers of the Company. All seven lawsuits assert overlapping claims - generally that the defendants breached their fiduciary duties, mismanaged the Company, wasted corporate assets, and engaged in, facilitated or approved self-dealing transactions in breach of their fiduciary obligations. The Depuy lawsuit also alleges violations of federal securities laws in connection with the Company allegedly filing and distributing certain misleading proxy statements. The lawsuits seek, among other relief, injunctive relief related to the Company's corporate governance and unspecified damages.

On April 10, 2013, the U.S. District Court for the Western District of Oklahoma consolidated the Levine, Depuy, Elliot, Brothers, and Ezell actions (the “Federal Shareholder Derivative Litigation”) under the caption “In re SandRidge Energy, Inc. Shareholder Derivative Litigation,” appointed a lead plaintiff and lead counsel, and ordered the lead plaintiff to file a consolidated complaint by May 1, 2013. On June 3, 2013, the Company and the individual defendants filed their respective motions to dismiss the consolidated complaint. On September 11, 2013, the court granted the defendants’ respective motions to dismiss the consolidated complaint without prejudice, and granted plaintiffs leave to file an amended consolidated complaint. The plaintiffs filed an amended consolidated complaint on October 9, 2013, in which plaintiffs allege that: (i) the Company’s former Chief Executive Officer (“CEO”), Tom Ward, breached his fiduciary duties by usurping corporate opportunities, (ii) certain of the Company’s current and former directors breached their fiduciary duties of care, (iii) Mr. Ward and certain of the Company’s current and former directors wasted corporate assets, (iv) certain entities allegedly affiliated with Mr. Ward aided and abetted Mr. Ward’s breaches of fiduciary duties, (v) Mr. Ward and entities allegedly affiliated with Mr. Ward misappropriated the Company’s confidential and proprietary information, and (vi) entities allegedly affiliated with Mr. Ward were unjustly enriched. On November 15, 2013, the Company and the individual defendants filed their respective motions to dismiss the amended consolidated complaint. On September 22, 2014, the court denied the motion to dismiss filed on behalf of the Company and the director defendants. The court also granted in part and denied in part the respective motions to dismiss filed on behalf of the other defendants.

On May 8, 2013, the court stayed the Romano action pending further order of the court. On October 29, 2014, the court granted plaintiff’s application to dismiss the action without prejudice.

On September 26, 2014, the Board formed a Special Litigation Committee (“SLC”), composed of two independent and disinterested Company directors, and delegated absolute and final authority to the SLC to review and investigate the claims alleged by the plaintiffs in the Federal Shareholder Derivative Litigation and in the Hefner action, and to determine whether or how those claims should be asserted on the Company’s behalf.

On November 30, 2015, the court stayed the Hefner action until further order of the court. An estimate of reasonably possible losses associated with the Hefner action cannot be made at this time. The Company has not established any reserves relating to this action.

On October 7, 2015, the derivative plaintiffs in the Federal Shareholder Derivative Litigation, the SLC, and the individual defendants in the Federal Shareholder Derivative Litigation (Tom Ward, Jim Brewer, Everett Dobson, William Gilliland, Daniel Jordan, Roy Oliver Jr., and Jeffrey Serota), executed a Stipulation of Settlement, which would result in a partial settlement of the Federal Shareholder Derivative Litigation by settling all claims against the individual defendants, subject to certain terms and conditions, including the approval of the court. Under the terms of the proposed partial settlement, the Company would implement or agree to maintain certain corporate governance reforms, and the insurers for the individual defendants would pay $38.0 million to an escrow fund, which would be used to pay certain expenses arising from pending securities litigation and, to the extent funds remain after paying such expenses, would be paid to the Company without any further restrictions on the Company’s use of such funds. The proposed partial settlement expressly provides, among other terms, that the settling defendants deny all allegations of wrongdoing and are entering into the settlement solely to avoid the costs, disruption, uncertainty, and risk of further litigation.

On October 9, 2015, the court issued an Order granting preliminary approval of the Stipulation of Settlement and, after notice and a hearing on December 18, 2015, the court issued a Final Judgment and Order on December 22, 2015, granting final approval of the Stipulation of Settlement. The partial settlement did not settle any of the derivative plaintiffs’ claims against non-settling defendants WCT Resources, L.L.C., 192 Investments, L.L.C., and TLW Land & Cattle, L.P in the Federal Shareholder Derivative Litigation. On January 12, 2016, a shareholder who objected to the Stipulation of Settlement filed a notice of appeal of the court’s Final Judgment and Order approving the Stipulation of Settlement.

On March 31, 2016, the derivative plaintiffs in the Federal Shareholder Derivative Litigation, the SLC, and the remaining defendants, WCT Resources, L.L.C., 192 Investments, L.L.C., and TLW Land & Cattle, L.P., executed a Stipulation of Settlement,

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(Unaudited)


which would resolve the remaining claims in the Federal Shareholder Derivative Litigation. Under the terms of the proposed settlement, the remaining defendants would make a payment of $500,000 to the Company, less taxes, expenses, and incentive awards. Counsel for the derivative plaintiffs have agreed that they will not seek reimbursement of expenses in excess of $120,000. Counsel for the derivative plaintiffs have also agreed that they will not seek incentive awards for the two named plaintiffs in excess of $15,000 each.

On April 6, 2016, the court issued an Order granting preliminary approval of the Stipulation of Settlement and establishing procedures for notice to shareholders and consideration of any shareholder objections to the settlement. The court also set a hearing for final approval of the proposed settlement on June 15, 2016.

On December 5, 2012, James Glitz and Rodger A. Thornberry, on behalf of themselves and all other similarly situated stockholders, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain current and former executive officers of the Company. On January 4, 2013, Louis Carbone, on behalf of himself and all other similarly situated stockholders, filed a substantially similar putative class action complaint in the same court and against the same defendants. On March 6, 2013, the court consolidated these two actions under the caption “In re SandRidge Energy, Inc. Securities Litigation” (the “Securities Litigation”) and appointed a lead plaintiff and lead counsel. On July 23, 2013, plaintiffs filed a consolidated amended complaint, which asserts a variety of federal securities claims against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class of (a) purchasers of SandRidge common stock during the period from February 24, 2011 to November 8, 2012, (b) purchasers of common units of the Mississippian Trust I in or traceable to its initial public offering on or about April 12, 2011, and (c) purchasers of common units of the Mississippian Trust II (together with the Mississippian Trust I, the “Mississippian Trusts”) in or traceable to its initial public offering on or about April 23, 2012. The claims are based on allegations that the Company, certain of its current and former officers and directors, and the Mississippian Trusts, among other defendants, are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and natural gas reserves, the Company's capital expenditures, and certain transactions entered into by companies allegedly affiliated with the Company's former CEO Tom Ward.

On May 11, 2015, the court dismissed without prejudice plaintiffs’ claims against the Mississippian Trusts and the underwriter defendants. On August 27, 2015, the court dismissed without prejudice plaintiffs’ claims against the Company and the individual current and former officers and directors, and granted plaintiffs leave to file a second amended consolidated complaint.

On October 23, 2015, plaintiffs filed their Second Consolidated Amended Complaint in which plaintiffs assert federal securities claims against the Company and certain of its current and former officers and directors on behalf of a putative class of purchasers of SandRidge common stock during the period between February 24, 2011, and November 8, 2012. The claims are based on allegations that the Company and certain of its current and former officers and directors are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and gas reserves, the Company’s capital expenditures, and certain transactions entered into by companies allegedly affiliated with the Company’s former CEO Tom Ward.

Because the Securities Litigation is in the early stages, an estimate of reasonably possible losses associated with it, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to the Securities Litigation. Each of the Mississippian Trusts has requested that the Company indemnify it for any losses it may incur in connection with the Securities Litigation.

On July 15, 2013, James Hart and 15 other named plaintiffs filed an amended complaint in the United States District Court for the District of Kansas in an action undertaken individually and on behalf of others similarly situated against SandRidge Energy, Inc., SandRidge Operating Company, SandRidge Exploration and Production, LLC (“SandRidge E&P”), SandRidge Midstream, Inc., and Lariat Services, Inc. In their Amended Complaint, plaintiffs allege that the defendants failed to properly calculate overtime pay for the plaintiffs and for other similarly situated current and former employees. The plaintiffs further allege that the defendants required the plaintiffs and other similarly situated current and former employees to engage in work-related activities without pay. The plaintiffs assert claims against the defendants for (i) violations of the Fair Labor Standards Act, (ii) violations of the Kansas Wage Payment Act, (iii) breach of contract, and (iv) fraud, and seek to recover unpaid wages and overtime pay, liquidated damages, statutory penalties, economic damages, compensatory and punitive damages, attorneys’ fees and costs, and both pre- and post-judgment interest.


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(Unaudited)


On October 3, 2013, the plaintiffs filed a Motion for Conditional Collective Action Certification and for Judicial Notice to the Class and a Motion to Toll the Statute of Limitations. On October 11, 2013, the defendants filed a Motion to Dismiss and a Motion to Transfer Venue to the United States District Court for the Western District of Oklahoma.

On April 2, 2014, the court granted the defendants’ Motion to Dismiss and granted plaintiffs leave to file an amended complaint by April 16, 2014, which they did on such date. On July 1, 2014, the court granted plaintiffs’ Motion for Conditional Collective Action Certification and for Judicial Notice to the Class, and denied plaintiffs’ Motion to Toll the Statute of Limitations.

On May 27, 2015, the parties reached an agreement in principle to settle this lawsuit. Pursuant to such agreement, the Company will establish a settlement fund from which to pay participating plaintiffs’ claims as well as plaintiffs’ attorneys’ fees. The proposed settlement agreement is subject to final negotiations between the parties and court approval. During 2015, the Company established a $5.1 million reserve for this lawsuit.

As previously disclosed, on December 18, 2013 the Company received a subpoena duces tecum from the U.S. Department of Justice in connection with an ongoing investigation of possible violations of antitrust laws in connection with the purchase or lease of land, oil or natural gas rights. The transactions that have been the subject of the inquiry date from 2012 and prior years. On April 7, 2015, the U.S. Department of Justice notified the Company that it is a target of a grand jury investigation in the Western District of Oklahoma concerning violations of federal antitrust law. On April 14, 2016, the U.S. Department of Justice notified the Company that it is no longer a subject or target of this grand jury investigation.

On June 9, 2015, the Duane & Virginia Lanier Trust, individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class of (a) purchasers of common units of the Mississippian Trust I pursuant or traceable to its initial public offering on or about April 7, 2011, and/or at other times during the time period between April 7, 2011, and November 8, 2012 (the “Class Period”), and (b) purchasers of common units of the Mississippian Trust II pursuant or traceable to its initial public offering on or about April 17, 2012, and/or at other times during the Class Period. The claims are based on allegations that the Company, certain of its current and former officers and directors, and the Mississippian Trusts, among other defendants, are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and natural gas reserves and the Company's capital expenditures. The Company and the other defendants intend to defend this lawsuit vigorously. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action. Each of the Mississippian Trusts has requested that the Company indemnify it for any losses it may incur in connection with this lawsuit.

On July 30, 2015, Barton Gernandt, Jr., individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class comprised of all persons, except the named defendants and their immediate family members, who were participants in, or beneficiaries of, the SandRidge Energy, Inc. 401(k) Plan (the “401(k) Plan”) at any time between August 2, 2012, and the present, and whose 401(k) Plan accounts included investments in SandRidge common stock. The plaintiff purports to bring the action both derivatively on the 401(k) Plan’s behalf pursuant to ERISA §§ 409 and 502, and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The plaintiff’s claims are based on allegations that the defendants breached their fiduciary duties owed to the 401(k) Plan and to the 401(k) Plan participants by allowing the investment of the 401(k) Plan’s assets in SandRidge stock when it was otherwise allegedly imprudent to do so based on the financial condition of the Company and the fact the Company’s common stock was artificially inflated because, among other things, the Company materially overstated the amount of oil being produced and the ratio of oil to natural gas in one of its core holdings.

On August 19, 2015, Christina A. Cummings, individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers, among other defendants, on behalf of a putative class comprised of all participants for whose individual accounts the 401(k) Plan held shares of the Company’s common stock from November 8, 2012, to the present, inclusive. The plaintiff purports to bring the action both derivatively on the 401(k) Plan’s behalf pursuant to ERISA §§ 409 and 502, and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The plaintiff’s claims are based on allegations that the defendants breached their fiduciary duties owed to the 401(k) Plan and to the 401(k) Plan participants by allowing the investment

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(Unaudited)


of the 401(k) Plan’s assets in SandRidge stock when it was otherwise allegedly imprudent to do so based on the financial condition of the Company. On September 10, 2015, the Court consolidated this action with the Gernandt action.

On September 14, 2015, Richard A. McWilliams, individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class comprised of all persons, except the named defendants and their immediate family members, who were participants in, or beneficiaries of, the 401(k) Plan at any time between August 2, 2012, and the present, and whose 401(k) Plan accounts included investments in the Company’s common stock. The plaintiff purports to bring the action both derivatively on the 401(k) Plan’s behalf pursuant to ERISA §§ 409 and 502, and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The plaintiff’s claims are based on allegations that the defendants breached their fiduciary duties owed to the 401(k) Plan and to the 401(k) Plan participants by allowing the investment of the 401(k) Plan’s assets in the Company’s common stock when it was otherwise allegedly imprudent to do so based on the financial condition of the Company and the fact the Company’s stock was artificially inflated because, among other things, the Company materially overstated the amount of oil being produced and the ratio of oil to natural gas in one of its core holdings. On September 24, 2015, the Court consolidated this action with Gernandt action.

On November 24, 2015, the plaintiffs filed a Consolidated Class Action Complaint in the consolidated Gernandt action. The Company intends to defend this consolidated lawsuit vigorously. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On November 18, 2015, Mickey Peck, on behalf of himself and others similarly situated, filed a First Amended Collective Action Complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc., and SandRidge Operating Company for violations of the Fair Labor Standards Act. Plaintiff alleges that the Company improperly classified certain of its consultants as independent contractors rather than as employees and, therefore, improperly paid such consultants a day rate without paying any overtime compensation. On January 14, 2016, the Court entered an Order conditionally certifying the class and providing for notice. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On January 12, 2016, Lisa Griggs and April Marler, on behalf of themselves and all other similarly situated, filed a putative class action petition in the District Court of Logan County, Oklahoma, against SandRidge Exploration and Production, LLC, and certain other oil and gas exploration companies. In their petition, plaintiffs assert various tort claims based upon purported damage and loss resulting from earthquakes allegedly caused by the defendants’ operations of wastewater disposal wells. Plaintiffs seek to certify a class of “all residents of Oklahoma owning real property from 2011 through the time the Class is certified.” On February 16, 2016, the defendants filed a Notice of Removal of the lawsuit to the United States District Court for the Western District of Oklahoma. On April 8, 2016, the plaintiffs filed a Motion to Remand the action back to the District Court of Logan County, Oklahoma. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On February 12, 2016, Brenda Lene and Jon Darryn Lene filed a petition in the District Court of Logan County, Oklahoma, against SandRidge Exploration and Production, LLC, and certain other oil and gas exploration companies. In their petition, plaintiffs assert various tort claims based on their allegations that their home suffered damages due to earthquakes allegedly caused by the defendants’ operations of wastewater disposal wells. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On April 11, 2016, Public Justice, on behalf of the Sierra Club, filed a civil action against SandRidge Exploration and Production, LLC, among other defendants, in the United States District Court for the Western District of Oklahoma. Plaintiff seeks declaratory and injunctive relief under the citizen suit provision of the Resource Conservation and Recovery Act (“RCRA”) to enforce alleged violations of RCRA relating to earthquakes allegedly induced by the defendants’ injection and disposal into the ground of oil and gas production wastes. Plaintiff seeks an order preliminarily and permanently enjoining the defendants by

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(Unaudited)


ordering them to (i) substantially reduce the amounts of production wastes being injected into the ground, (ii) reinforce vulnerable structures that current forecasts show could be impacted by large magnitude earthquakes, and (iii) establishing an independent earthquake monitoring center. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiff’s claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On March 3, 2016, Brian Thieme, on behalf of himself and all others similarly situated, filed a putative class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that, commencing on or around December 27, 2007, and continuing until at least March 31, 2012, the defendants conspired to rig bids and depress the market for the purchases of oil and natural gas leasehold interests and properties containing producing oil and natural gas wells located in certain areas of Oklahoma, Texas, Colorado and Kansas, in violation of Sections 1 and 3 of the Sherman Antitrust Act. Plaintiff seeks to certify two separate and distinct classes of members.

On March 10, 2016, Don Beadles, in Trust for the Alva Synagogue Church, on behalf of himself and all others similarly situated, filed a putative class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that since as early as December 2007, and continuing until at least as late as March 2012 (the “Relevant Class Period”), the defendants conspired to rig bids and otherwise depress the amounts they paid to property owners for the acquisition of oil and gas leasehold interests and producing properties located in certain areas of Oklahoma, Texas, Colorado and Kansas, in violation of Sections 1 and 3 of the Sherman Antitrust Act. Plaintiff seeks to certify a class of “[a]ll persons and entities that, during the Relevant Class Period, provided or sold to one of more of the Defendants (a) oil and gas leasehold interests on their property and/or (b) the producing properties, in exchange for lease payments, including but not limited to lease bonuses.”

On March 24, 2016, Janet L. Lowry, on behalf of herself and all others similarly situated, filed a putative class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that, commencing on or around December 27, 2007, and continuing until at least March 31, 2012, the defendants conspired to rig bids and depress the price of royalty and bonus payments exchanged for purchases of oil and natural gas leasehold interests and interests in properties containing producing oil and natural gas wells located in certain areas of Oklahoma, Texas, Colorado and Kansas, in violation of Section 1 of the Sherman Antitrust Act. Plaintiff seeks to certify two separate and distinct classes of members. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On April 15, 2016, the United States District Court for the Western District of Oklahoma consolidated the Thieme, Beadles, and Lowry cases under the caption “In re Anadarko Basin Oil and Gas Lease Antitrust Litigation,” together with eight additional subsequently filed cases, as well as with any other cases pending in the court, alleging similar violations under the Sherman Antitrust Act and the Oklahoma Antitrust Reform Act (the “Federal Antitrust Litigation”). The Federal Antitrust Litigation is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On March 29, 2016, Harold Koppitz, on behalf of himself and all others similarly situated, filed a putative class action petition in the District Court of Woods County, Oklahoma, against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that, commencing on or around February 1, 2007, and continuing until at least March 31, 2012, the defendants conspired to rig bids and depress the market for purchases of oil and natural gas leasehold interests located within the State of Oklahoma in violation of the Oklahoma Antitrust Reform Act. Plaintiff seeks to certify two separate and distinct classes of members.

On April 26, 2016, the defendants filed a Notice of Removal of the lawsuit to the United States District Court for the Western District of Oklahoma. On that same date, plaintiff voluntarily dismissed his petition. On April 29, 2016, plaintiff filed a new petition in the District Court of Woods County, Oklahoma, against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants, in which plaintiff makes allegations substantially similar to the allegations contained in his original petition. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with

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(Unaudited)


this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiff’s claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On April 13, 2016, Wesley and Towanda Mallory, on behalf of themselves and all others similarly situated, filed a putative class action petition in the District Court of Stephens County, Oklahoma, against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiffs allege that, commencing on or around December 27, 2007, and continuing until at least April 1, 2013 (the “Class Period”), the defendants conspired to rig bids and depress prices for oil and natural gas leasehold and working interests and producing properties within the State of Oklahoma in violation of the Oklahoma Antitrust Reform Act. Plaintiffs seek to certify a class of “[a]ll Oklahoma citizens and entities that, during the relevant Class Period, provided or sold to one of more of the Defendants (a) oil and gas leasehold interests on their property and/or (b) the producing properties or interests relating to land located in the Anadarko Basin Region, in exchange for lease payments, including but not limited to lease bonuses.” This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On February 4, 2015, the staff of the Securities and Exchange Commission (the “SEC”) Enforcement Division in Washington, D.C., notified the Company that it had commenced an informal inquiry concerning the Company’s accounting for, and disclosure of, its carbon dioxide delivery shortfall penalties under the terms of the Gas Treating and CO2 Delivery Agreement, dated June 29, 2008, between SandRidge Exploration and Production, LLC, and Oxy USA Inc.

Additionally, the Company received a letter from an attorney for a former employee at the Company (the “Former Employee”). In the letter, the attorney alleged, among other things, that the Former Employee had been terminated because he had objected to the levels of oil and gas reserves disclosed by the Company in its public filings. Over 85% of such reserves were calculated by an independent petroleum engineering firm.  The Audit Committee of the Company’s Board of Directors has retained an independent law firm to review the Former Employee’s allegations and the circumstances of the Former Employee’s termination. In addition, the Company reported the Former Employee’s allegations to the SEC staff, which thereafter issued two subpoenas to the Company relating to the Former Employee’s allegations.  Counsel for the Audit Committee is responding to both of these subpoenas.

During the course of the above inquiries, the SEC issued a subpoena to the Company seeking documents relating to employment-related agreements between the Company and certain employees. The Company is cooperating with this inquiry and, after discussion with the staff, the Company sent corrective letters to certain current and former employees who had entered into agreements containing language that may have been inconsistent with SEC rules prohibiting a company from impeding an individual from communicating directly with the SEC about possible securities law violations. The Company also updated its Code of Conduct and other relevant policies.

The Company continues to cooperate with the above inquiries and is unable to predict their outcome or the possible loss, if any, that could result from their potential resolution.

In addition to the litigation described above, the Company is a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.

Commencement of the Chapter 11 Cases automatically stayed certain actions against the Company, including actions to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates, and the Company intends to seek authority to pay all general claims in the ordinary course of business notwithstanding the commencement of the Chapter 11 Cases in a manner consistent with the Restructuring Support Agreement. The Plan in the Chapter 11 Cases, if confirmed as contemplated by the Restructuring Support Agreement, will provide for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 Cases. See Note 17 for further discussion about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

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(Unaudited)


Risks and Uncertainties

The Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future. The Company enters into commodity derivative arrangements in order to mitigate a portion of the effect of this price volatility on the Company’s cash flows. See Note 8 for the Company’s open oil and natural gas derivative contracts.

Production targets contained in certain gathering and treating agreements require the Company to incur capital expenditures or make associated shortfall payments. The Company depends on cash flows from operating activities and, as necessary, borrowings under its senior credit facility to fund its capital expenditures. Based on current cash balances, cash flows from operating activities and net borrowings under the senior credit facility in 2016, the Company expects to be able to fund its planned capital expenditures budget, debt service requirements and working capital needs for 2016; however, if current depressed oil or natural gas prices persist for a prolonged period or further decline, they would have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced, which would further adversely impact the Company’s ability to comply with the financial covenants under its senior credit facility. See Note 2 and Note 7 for further discussion of the financial covenants in the senior credit facility.


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11. Equity

Common Stock

During the three-month period ended March 31, 2016, the Company issued approximately 84.4 million shares of common stock upon the exercise of conversion options by holders of approximately $232.1 million in par value of the Convertible Senior Unsecured Notes. The Company recorded the issuance of common shares at fair value on the various dates the exchanges occurred. See Note 7 for additional discussion of the Convertible Senior Unsecured Notes transactions.
Preferred Stock Dividends

Dividends on the Company’s 8.5% and 7.0% convertible perpetual preferred stock may be paid in cash or with shares of the Company’s common stock at the Company’s election. In the first quarter of 2015, dividends of $11.3 million on the Company’s 8.5% convertible perpetual preferred stock were paid in cash. In the first quarter of 2016, prior to the February semi-annual dividend payment date, the Company announced the suspension of payment of the semi-annual dividend on its 8.5% convertible perpetual preferred stock. The Company suspended payment of the cumulative dividend on its 7.0% convertible perpetual preferred stock during the third quarter of 2015. At March 31, 2016, the Company had dividends in arrears of $11.3 million and $10.5 million on its 8.5% and 7.0% convertible perpetual preferred stock, respectively.

Paid and unpaid dividends included in the calculation of loss applicable to the Company’s common stockholders and the Company’s basic loss per share calculation for the three-month periods ended March 31, 2016 and 2015 are presented in the accompanying unaudited condensed consolidated statements of operations.

See Note 13 for discussion of the Company’s loss per share calculation.

Treasury Stock

The Company makes required statutory tax payments on behalf of employees when their restricted stock awards vest and then withholds a number of vested shares of common stock having a value on the date of vesting equal to the tax obligation. The following table shows the number of shares withheld for taxes and the associated value of those shares for the three-month periods ended March 31, 2016 and 2015. These shares were accounted for as treasury stock when withheld and then immediately retired.
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Number of shares withheld for taxes
853

 
719

Value of shares withheld for taxes
$
37

 
$
1,218


Stockholder Receivable

The Company is party to a settlement agreement relating to a third-party claim against its former CEO under Section 16(b) of the Securities Exchange Act of 1934, as amended. Based on the nature of the settlement as well as the former CEO’s position as an officer of the Company at the time of the settlement, the receivable is classified as a component of additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets. The remaining amount receivable under the agreement as of March 31, 2016 and December 31, 2015 was $1.3 million and is due in October 2016.

See Note 14 for discussion of the Company’s share-based compensation.


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12. Income Taxes

The Company estimates for each interim reporting period the effective tax rate expected for the full fiscal year and uses that estimated rate in providing for income taxes on a current year-to-date basis. The provision for income taxes consisted of the following components for the three-month periods ended March 31, 2016 and 2015 (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Current
 
 
 
Federal
$

 
$

State
4

 
40

Total provision
4

 
40

Less: income tax provision attributable to noncontrolling interest

 
30

Total provision attributable to SandRidge Energy, Inc.
$
4

 
$
10


Deferred income taxes are provided to reflect the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company’s deferred tax assets have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. The Company continues to closely monitor and weigh all available evidence, including both positive and negative, in making its determination whether to maintain a valuation allowance. As a result of the significant weight placed on the Company's cumulative negative earnings position, the Company continued to maintain the full valuation allowance against its net deferred tax asset at March 31, 2016. Thus the Company’s effective tax rate and tax expense for the three-month period ended March 31, 2016 continues to be low as a result of the Company not recognizing an income tax benefit associated with its net loss from the same period.
    
Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced ownership changes within the meaning of IRC Section 382 during 2008 and 2010 that subjected certain of the Company’s tax attributes, including $929.4 million of federal net operating loss carryforwards, to the IRC Section 382 limitation. These limitations could result in all or a portion of the remaining $484.5 million limited net operating loss carryforwards expiring unused. None of these limitations resulted in a current federal tax liability at March 31, 2016.

At both March 31, 2016 and December 31, 2015, the Company had a liability of approximately $0.1 million for unrecognized tax benefits. The Company does not expect a significant change in its gross unrecognized tax benefits balance within the next twelve months.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2012 to present remain open for federal examination. Additionally, tax years 2005 through 2011 remain subject to examination for the purpose of determining the amount of remaining federal net operating loss and other carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years.    


34

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


13. Loss per Share

The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted loss per share, for the three-month periods ended March 31, 2016 and 2015:
 
Net Loss
 
Weighted Average Shares
 
Loss Per Share
 
(In thousands, except per share amounts)
Three Months Ended March 31, 2016
 
 
 
 
 
Basic loss per share
$
(324,107
)
 
689,784

 
$
(0.47
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock and units(1)

 

 
 
Convertible preferred stock(2)

 

 
 
Convertible senior unsecured notes(3)

 

 
 
Diluted loss per share
$
(324,107
)
 
689,784

 
$
(0.47
)
Three Months Ended March 31, 2015
 
 
 
 
 
Basic loss per share
$
(1,045,834
)
 
478,165

 
$
(2.19
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock and units(1)

 

 
 
Convertible preferred stock(2)

 

 
 
Diluted loss per share
$
(1,045,834
)
 
478,165

 
$
(2.19
)
____________________
(1)
No incremental shares of potentially dilutive restricted stock awards or units were included for the three-month periods ended March 31, 2016 or 2015 as their effect was antidilutive under the treasury stock method.
(2)
Potential common shares related to the Company’s outstanding 8.5% and 7.0% convertible perpetual preferred stock covering 67.6 million and 71.7 million shares for the three-month periods ended March 31, 2016 and 2015, respectively, were excluded from the computation of loss per share because their effect would have been antidilutive under the if-converted method.
(3)
Potential common shares related to the Company’s outstanding 8.125% and 7.5% Convertible Senior Unsecured Notes covering 58.3 million shares for the three-month period ended March 31, 2016 were excluded from the computation of loss per share because their effect would have been antidilutive under the if-converted method.

See Note 7 for discussion of common stock issued in exchange for Senior Unsecured Notes and issuance of the Convertible Senior Unsecured Notes.


35

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


14. Share-Based Compensation

The Company issues share-based compensation awards including restricted common stock awards, restricted stock units, performance units and performance share units under the SandRidge Energy, Inc. 2009 Incentive Plan. Total share-based compensation expense is measured using the grant date fair value for equity-classified awards and using the fair value at period end for liability-classified awards.

Restricted Common Stock Awards

The Company’s restricted common stock awards generally vest over a four-year period, subject to certain conditions, and are valued based upon the market value of the Company’s common stock on the date of grant. The following table presents a summary of the Company’s unvested restricted stock awards.
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
 
(In thousands)
 
 
Unvested restricted shares outstanding at December 31, 2015
5,626

 
$
4.85

Granted

 
$

Vested
(2,279
)
 
$
6.15

Forfeited / Canceled
(107
)
 
$
6.25

Unvested restricted shares outstanding at March 31, 2016
3,240

 
$
3.89


As of March 31, 2016, the Company’s unrecognized compensation cost related to unvested restricted stock awards was $10.0 million. Such cost is expected to be recognized over a weighted-average period of 2.0 years. The Company’s restricted stock awards are equity-classified awards.
    
Allocation of Share-Based Compensation

Equity compensation provided to employees directly involved in exploration and development activities is capitalized to the Company’s oil and natural gas properties. Equity compensation not capitalized is recognized in general and administrative expenses, production expenses, cost of sales and midstream and marketing expenses in the unaudited condensed consolidated statements of operations. For the three-month periods ended March 31, 2016 and 2015, the Company recognized share-based compensation expense of $7.4 million and $5.7 million, net of $0.6 million and $1.4 million capitalized, respectively. Share-based compensation expense for the three-month period ended March 31, 2016, includes $5.3 million for the accelerated vesting of 1.3 million restricted common stock awards and an insignificant amount of expense for the accelerated vesting of 1.8 million unvested restricted stock units, which may be settled in cash or stock, related to the Company’s reduction in workforce. Additionally, the Company accelerated the vesting of approximately 1.3 million unvested restricted stock units, which were granted to the Company’s management and had an original vesting date of December 31, 2016. This resulted in an insignificant amount of stock compensation expense which was settled in cash. There was no significant activity related to the Company’s outstanding performance units and performance share units during the three-month period ended March 31, 2016.

36

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


15. Business Segment Information

During the three-month period ended March 31, 2016, the Company had two reportable segments: exploration and production and midstream services. These segments represent the Company’s two main business units, each offering different products and services. The exploration and production segment is engaged in the exploration and production of oil and natural gas properties and includes the Company’s proportionate share of the activities of the Royalty Trusts. The midstream services segment coordinates the delivery of electricity to the Company’s exploration and production operations in the Mid-Continent. During the three-month period ended March 31, 2015, the Company operated in a third reportable segment, drilling and oilfield services; however, due to the discontinuance of the substantial majority of activity within the drilling and oilfield services business during the first quarter of 2016, this business no longer constitutes a reportable segment. The All Other columns in the tables below include items not related to the Company’s currently reportable segments, including drilling and oilfield services activity and the Company’s corporate operations.

37

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Management evaluates the performance of the Company’s business segments based on income (loss) from operations. Summarized financial information concerning the Company’s segments is shown in the following table (in thousands):
 
Exploration and Production(1)(2)
 
Midstream Services(3)
 
All Other
 
Consolidated Total
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
Revenues
$
84,375

 
$
10,245

 
$
4,189

 
$
98,809

Inter-segment revenue

 
(5,958
)
 
(2,519
)
 
(8,477
)
Total revenues
$
84,375

 
$
4,287

 
$
1,670

 
$
90,332

Loss from operations
$
(232,207
)
 
$
(3,588
)
 
$
(37,760
)
 
$
(273,555
)
Interest expense, net

 

 
(81,151
)
 
(81,151
)
Gain on extinguishment of debt

 

 
41,331

 
41,331

Other income expense, net
750

 
(495
)
 
(102
)
 
153

Loss before income taxes
$
(231,457
)
 
$
(4,083
)
 
$
(77,682
)
 
$
(313,222
)
Capital expenditures(4)
$
50,544

 
$
1,230

 
$
1,707

 
$
53,481

Depreciation, depletion, amortization and accretion
$
33,934

 
$
2,446

 
$
4,369

 
$
40,749

At March 31, 2016
 
 
 
 
 
 
 
Total assets
$
1,430,717

 
$
205,382

 
$
937,960

 
$
2,574,059

Three Months Ended March 31, 2015
 
 
 
 
 
 
 
Revenues
$
195,743

 
$
21,529

 
$
25,596

 
$
242,868

Inter-segment revenue
(11
)
 
(12,765
)
 
(14,784
)
 
(27,560
)
Total revenues
$
195,732

 
$
8,764

 
$
10,812

 
$
215,308

Loss from operations
$
(1,054,158
)
 
$
(3,873
)
 
$
(30,425
)
 
$
(1,088,456
)
Interest expense, net
(16
)
 

 
(62,826
)
 
(62,842
)
Other (expense) income, net
(454
)
 
4